Gold Volatility Fueled by Structured Note Trades, BNP SaysAlastair Marsh
Investors in structured notes tied to gold exacerbated the biggest slump in prices since 1980 as they sold the precious metal to contain losses on the securities, according to BNP Paribas SA.
Gold capped its worst two-day slump in 33 years on April 15, plunging 13 percent to $1335.75. Banks sold a total of $1.28 billion of gold-linked notes in the U.S. that remain outstanding, according to data compiled by Bloomberg.
Private banks that bought so-called reverse convertibles risked losing money when the gold price breached predetermined price levels, said Guillaume Picot, the global head of commodity investor sales and structuring at BNP Paribas in Paris.
“It’s hard to determine what was the biggest cause for gold’s decline, but structured products played a part in exacerbating the downward spiral,” said Picot.
An investor in a reverse convertible gives up any future gains in an underlying asset in exchange for a high fixed rate of interest. The securities typically return investor’s principal as long as the underlying is not below a predetermined level at maturity.
The biggest reason for the move in gold was investor liquidations of gold-backed exchange-traded products, said Jerome Gaudry, the London-based head of commodity structuring at Natixis SA. Gold holdings in ETPs plunged 174 metric tons last month, the biggest drop ever, as prices entered a bear market and wiped $17.9 billion from the value of the funds, data compiled by Bloomberg show.
Bullion for immediate delivery rose as much as 0.7 percent to $1,477.05 an ounce at 9:17 a.m. in London.
Gold traders are the most bearish in three years on the metal. Twenty analysts surveyed by Bloomberg expect bullion to drop next week, with nine bullish and four neutral, the biggest proportion of bears since February 2010.
Structured notes package debt with derivatives to offer customized bets to investors while earning fees and raising money. Derivatives are contracts whose value is based on stocks, bonds, currencies and commodities.